Block Insurance Premiums: Understanding & Reducing Costs
A comprehensive guide to block insurance premiums, covering how buildings insurance costs are calculated, why insurance premiums have been rising, your rights as a leaseholder to challenge insurance premiums, and practical steps for reducing block insurance costs. Understand insurance commissions, broker options, and how premiums affect your service charge.
How Block Insurance Premiums Are Calculated
Block insurance premiums are determined by a range of factors that reflect the risk profile of the building. Understanding how insurers calculate premiums is the first step towards identifying whether you are paying a fair price and where savings might be available. The buildings insurance guide provides a broader overview of what buildings insurance covers, while this section focuses specifically on the factors that drive premium costs.
The rebuild cost of the building is the single most important factor. This is the estimated cost of reconstructing the entire building from the ground up, including demolition, materials, labour, and professional fees. Insurers use the rebuild cost, not the market value, to determine the sum insured. An outdated or inaccurate rebuild cost valuation can lead to the building being over-insured, resulting in unnecessarily high premiums, or under-insured, which poses a serious risk in the event of a major claim.
Beyond rebuild cost, insurers assess the building's claims history, its location and exposure to flood, subsidence, or storm risk, the building type and construction materials, the number of flats, whether the building has flat roofs or basements, and the overall standard of maintenance. A well-maintained building with a clean claims history and an accurate rebuild valuation will consistently achieve lower premiums than one with unresolved maintenance issues and frequent claims. For more on how insurance relates to block management, see our block insurance guide.
Why Insurance Premiums Have Been Rising
Block insurance premiums have increased significantly across the UK in recent years. Several interconnected factors have driven this trend, and understanding them helps leaseholders assess whether their own premium increases are in line with market conditions or whether there is scope to challenge or reduce costs.
Escape of Water Claims
Escape of water claims are the largest single cause of loss for insurers covering blocks of flats. Burst pipes, leaking radiators, failed washing machine hoses, and deteriorating plumbing systems can cause extensive damage to multiple flats within a building. The cost of remediation, including drying, stripping out, and reinstating affected areas, is often substantial. Insurers have responded by increasing premiums for all blocks, but particularly those with a history of water-related claims. Investing in preventative measures such as leak detection systems and regular plumbing inspections can help to mitigate this risk.
Subsidence and Ground Movement
Buildings located in areas with subsidence risk, particularly those on clay soils in the south-east of England, face higher premiums. Climate change has increased the frequency of dry summers, which cause clay soils to shrink and can lead to structural movement. Subsidence claims are expensive to resolve and can take years to settle, making insurers increasingly cautious about the terms and pricing they offer for buildings in affected areas.
Construction Cost Inflation
The cost of building materials and labour has risen sharply, driven by supply chain disruptions, increased demand, and broader inflationary pressures. This directly affects rebuild cost valuations and the cost of settling claims. When insurers pay out more on claims, they increase premiums across their portfolio to maintain profitability. Even buildings with no recent claims have been affected by this market-wide repricing.
Insurance Premium Tax and Regulatory Costs
Insurance Premium Tax (IPT) is levied on all general insurance premiums in the UK and is currently set at twelve per cent. This tax is passed directly to the policyholder and adds a significant amount to the overall cost. Additionally, insurers face increasing regulatory and compliance costs, which are factored into the premiums they charge. These costs are unavoidable but should be clearly itemised so that leaseholders can see what proportion of their service charge is going to tax rather than cover.
Leaseholder Rights to Challenge Insurance Premiums
Leaseholders are not powerless when it comes to block insurance premiums. The law provides several routes through which premiums can be scrutinised and challenged if they are considered unreasonable. Understanding these rights is essential for any leaseholder who believes they are paying too much for buildings insurance through their service charge.
Section 19 - Reasonableness of Costs
Under Section 19 of the Landlord and Tenant Act 1985, all costs passed on through the service charge must be reasonably incurred, and this includes insurance premiums. If a leaseholder believes the premium is excessive, they can apply to the First-tier Tribunal (Property Chamber) under Section 27A for a determination on whether the cost was reasonable. The Tribunal will examine the premium in the context of the market, the cover provided, and whether the landlord or managing agent took reasonable steps to obtain competitive terms. Guidance on the dispute process is available in our service charge dispute resolution guide.
Right to Request Insurance Information
Leaseholders have the right to request a copy of the insurance policy, the schedule of cover, and a summary of the premium paid. Under the Landlord and Tenant Act 1985, leaseholders can also inspect the supporting documentation and any alternative quotes that were obtained. This transparency is essential for enabling leaseholders to assess whether the premium represents good value. If the managing agent or freeholder refuses to provide this information, leaseholders should raise the matter formally and consider applying to the Tribunal.
Leasehold Reform Act - Nominating an Insurer
The Leasehold Reform Act gives leaseholders the right to nominate an alternative insurer for consideration. Under Schedule 8 of the Act, a recognised tenants' association or a qualifying group of leaseholders can put forward an alternative insurance proposal, and the landlord is required to consider it. While the landlord is not obliged to accept the nomination, they must demonstrate that any decision to reject it is reasonable. This provision is a powerful tool for leaseholders who have obtained a more competitive quote and want to ensure their managing agent is not simply defaulting to a more expensive option.
Insurance Commissions and Transparency
Insurance commissions are one of the most contentious issues in block management. A commission is a payment made by the insurance broker or insurer to the managing agent or freeholder for placing the buildings insurance policy. These commissions are embedded in the premium and are ultimately paid by leaseholders through the service charge.
The concern with insurance commissions is that they can create a conflict of interest. A managing agent who receives a higher commission from one broker may be incentivised to place the insurance with that broker, even if a lower premium is available elsewhere. In some cases, commissions of twenty, thirty, or even forty per cent of the premium have been reported, significantly inflating the cost borne by leaseholders.
The Financial Conduct Authority (FCA) regulates the sale and arrangement of insurance in the UK. Under FCA rules, any firm involved in arranging insurance must disclose the nature and amount of commission received when asked by the customer. The RICS Service Charge Residential Management Code goes further, requiring managing agents who are RICS members to proactively disclose all commissions, referral fees, and other financial benefits received in connection with the service charge. For a detailed overview of transparency requirements, see our service charge transparency guide.
Leaseholders should ask their managing agent directly whether any insurance commission is received, what the amount is, and whether it is retained by the agent or credited back to the service charge account. If the agent refuses to disclose this information, leaseholders can raise the matter with the agent's professional body, the FCA, or through the service charge dispute resolution process.
Broker vs Direct Insurer: Choosing the Right Approach
When arranging buildings insurance for a block of flats, there are two main routes: using an insurance broker or approaching insurers directly. Each has advantages and disadvantages, and the right choice depends on the size and complexity of the building, the expertise available within the management structure, and the priority placed on cost versus service.
Using an Insurance Broker
A specialist block insurance broker will have access to a panel of insurers and can obtain multiple quotes on behalf of the building. Brokers understand the specific requirements of block insurance policies and can advise on appropriate cover levels, excesses, and endorsements. The disadvantage is that brokers earn commission, which is added to the premium. However, a good broker can often negotiate terms that more than offset their commission, particularly for larger or more complex buildings. Leaseholders should ask the broker to confirm the commission amount and whether it can be reduced.
Approaching Insurers Directly
Some resident management companies and right to manage companies choose to approach insurers directly, cutting out the broker and the associated commission. This can result in lower premiums, but requires the managing directors to have sufficient knowledge of insurance to assess the adequacy of cover, negotiate terms, and handle claims administration. Direct placement works best for straightforward buildings with no unusual risks. For more complex blocks, or where the management company does not have in-house expertise, using a broker is generally the safer option.
Tips for Reducing Block Insurance Premiums
At Block, we work proactively to manage insurance premiums on behalf of the buildings we manage. There are several practical steps that any block can take to reduce its insurance premium and ensure that leaseholders are getting value for money through their service charge.
- Obtain an up-to-date rebuild cost valuation from a qualified surveyor to ensure the building is neither over-insured nor under-insured
- Obtain multiple competitive quotes from specialist block insurance brokers and compare cover as well as price
- Invest in escape of water prevention measures, including leak detection systems, isolation valves, and regular plumbing inspections
- Maintain the building to a high standard, addressing roof repairs, pointing, and drainage issues promptly to reduce claim risk
- Review the claims history and implement measures to address the root causes of previous claims
- Consider increasing the voluntary excess on the policy to reduce the annual premium, provided the block can afford to meet excess costs
- Challenge insurance commissions and request that any commission received by the managing agent is disclosed and, where possible, credited to the service charge account
- If the block has a resident management company, explore placing the insurance directly to avoid broker commissions
Our approach is to treat insurance as a managed cost, not a fixed one. By combining competitive tendering, risk reduction, and transparent commission handling, we consistently achieve better outcomes for the buildings we manage. For advice on how insurance fits within the broader service charge framework, see our service charge guide. For guidance on making claims, see our insurance claims guide.
Service Charge Implications of Insurance Costs
Buildings insurance is typically one of the largest single items within the service charge for a block of flats. In many buildings, the insurance premium accounts for twenty to forty per cent of the total annual service charge, making it a critical area for cost management and transparency.
How Insurance Is Charged Through the Service Charge
The lease will normally specify that the cost of insuring the building is recoverable from leaseholders through the service charge. The premium is paid by the freeholder or managing agent and then apportioned among the leaseholders, usually in accordance with the percentages or ratios set out in the lease. The premium should be shown as a separate line item in the service charge accounts so that leaseholders can see exactly how much they are contributing towards insurance and how this compares with previous years.
Impact of Premium Increases on Leaseholders
When insurance premiums rise significantly, the increase is passed directly to leaseholders through the service charge. A twenty per cent increase in the insurance premium can translate to a meaningful increase in the overall service charge demand, particularly for buildings where insurance represents a large proportion of the budget. Leaseholders should scrutinise insurance costs annually and ask their managing agent to explain the reasons for any increase. Where the increase appears disproportionate, leaseholders can exercise their dispute resolution rights to challenge the cost.
Frequently Asked Questions About Block Insurance Premiums
Why are block insurance premiums so high?
Block insurance premiums have risen significantly in recent years due to a combination of factors affecting the insurance market. Escape of water claims have become the single largest driver of premium increases, with insurers paying out billions each year for burst pipes, leaking appliances, and failed plumbing in blocks of flats. Subsidence claims, particularly in areas with clay soils, add further pressure. The rising cost of building materials and labour means that rebuild costs have increased substantially, pushing up the sums insured and therefore the premiums charged. Inflation in the construction sector has outpaced general inflation, which means that even buildings with no claims history are seeing premium increases. Additionally, some managing agents receive commissions from insurance brokers or insurers, and these commissions are built into the premium cost passed on to leaseholders through the service charge. Leaseholders should request a full breakdown of the premium and ask whether any commission is being retained.
Can leaseholders challenge buildings insurance premiums?
Yes, leaseholders have the right to challenge buildings insurance premiums if they believe the cost is unreasonable. Under Section 19 of the Landlord and Tenant Act 1985, all service charge costs, including insurance premiums, must be reasonably incurred. A leaseholder can apply to the First-tier Tribunal (Property Chamber) for a determination on whether the insurance premium charged through the service charge is reasonable. The Tribunal will consider factors such as whether the premium reflects market rates, whether the level of cover is appropriate, and whether the managing agent or freeholder has taken reasonable steps to obtain competitive quotes. Leaseholders can also request to see the insurance policy, the schedule of cover, and any alternative quotes obtained. If the Tribunal finds the premium was not reasonably incurred, it can reduce the amount payable. Additionally, under the Leasehold Reform Act provisions, leaseholders can nominate their own insurer for consideration.
What is an insurance commission in block management?
An insurance commission in block management is a payment made by the insurance broker or insurer to the managing agent or freeholder for placing or arranging the buildings insurance policy. This commission is typically calculated as a percentage of the total premium and can range from ten to forty per cent or more in some cases. The commission is built into the premium cost, which means leaseholders are effectively paying for it through their service charge contributions. Insurance commissions have been a significant source of concern in the leasehold sector because they can create a conflict of interest: the managing agent may be incentivised to place the insurance with the broker or insurer offering the highest commission rather than the lowest premium. The Financial Conduct Authority requires that commissions be disclosed to policyholders, and the Leasehold Reform Act has strengthened transparency requirements. Leaseholders should ask their managing agent to confirm whether any commission is received and how much it is.
How can a block of flats reduce its insurance premium?
There are several practical steps a block of flats can take to reduce its buildings insurance premium. First, ensure the rebuild cost valuation is up to date and accurate, as an inflated rebuild cost will result in a higher premium than necessary. Second, obtain multiple quotes from specialist block insurance brokers to ensure the current premium is competitive. Third, invest in risk reduction measures such as leak detection systems, regular plumbing maintenance, and fire safety improvements, which can demonstrate to insurers that the block is well managed. Fourth, review the claims history and take steps to address the root causes of previous claims, as a poor claims record is one of the biggest factors driving premium increases. Fifth, consider increasing the voluntary excess on the policy, which can reduce the annual premium. Sixth, ensure the managing agent is not retaining excessive commissions that inflate the cost. Finally, if the block is managed by a resident management company, consider approaching insurers directly or using a broker that rebates commission to the policyholders.
Who chooses the buildings insurance for a block of flats?
The responsibility for choosing buildings insurance for a block of flats depends on the terms of the lease and who manages the building. In most cases, the lease places an obligation on the freeholder or landlord to insure the building, and this responsibility is often delegated to the managing agent. The managing agent will typically arrange the insurance through a broker, selecting a policy that provides adequate cover for the building at a competitive premium. However, leaseholders have rights in this process. Under Schedule 8 of the Leasehold Reform Act, leaseholders can nominate an alternative insurer for consideration, and the landlord must consider the nomination. If the building is managed by a resident management company or a right to manage company, the leaseholders themselves have direct control over the choice of insurer. In all cases, the insurance must provide adequate cover for the full rebuild cost, public liability, and any other risks specified in the lease.
Are managing agents required to disclose insurance commissions?
Yes, managing agents are required to disclose insurance commissions under multiple regulatory frameworks. The Financial Conduct Authority requires that any firm involved in arranging insurance must disclose to the customer, on request, the nature and amount of any commission received. Beyond FCA rules, the RICS Service Charge Residential Management Code requires managing agents who are RICS members to disclose all commissions, referral fees, and other financial benefits received in connection with the service charge, including insurance commissions. The Transparency, Influence and Consent requirements mean that agents must declare commissions before the policy is placed. Additionally, leaseholders have the right under Section 21 of the Landlord and Tenant Act 1985 to request a summary of service charge costs, which should include the insurance premium and any associated commissions. If a managing agent refuses to disclose commission details, leaseholders should raise the matter formally and, if necessary, report the agent to their professional body or the FCA.
Need Help With Block Insurance Premiums?
Whether you are a leaseholder who wants to understand or challenge your block insurance premium, a director looking for a more competitive quote, or you need guidance on insurance commissions and transparency requirements, Block is here to help. Our experienced team manages buildings insurance across hundreds of blocks nationwide, ensuring competitive premiums, full transparency, and expert claims handling.